The selling, general and administrative expense (also known as SG&A) is comprised of all operating costs of a business that are not included in the cost of goods sold. It also does not include financing costs, since those are not considered to be operating costs. SG&A appears in the income statement, below the cost of goods sold. It may be broken out into a number of expense line items, or consolidated into a single line item (which is more common when condensed income statement is presented).
The following departments and their expenses are all considered to fall within the SG&A classification:
- Accounting and legal expenses
- Corporate expenses
- Facility expenses
- Sales and marketing expenses
The classification generally does not include the expenses incurred by the research and development department.
SG&A expenses are mostly comprises of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. However, a few of these costs can be considered direct costs. For example, sales commissions directly relate to product sales, and yet may be considered part of SG&A. When an SG&A cost is considered a direct cost, it is acceptable to shift the cost into the cost of goods sold classification on the income statement.
From a management perspective, SG&A represents a large fixed cost that increases the breakeven point of a company, and therefore requires higher sales in order to turn a profit. Consequently, it is especially important to maintain tight control over SG&A costs, which can be achieved through the continual review of discretionary costs, trend line analysis, and comparisons of actual to budgeted costs.